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Potential Effects of Congressional Welfare Reform Legislation on Family Incomes Sheila R

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Potential Effects of Congressional Welfare Reform Legislation on Family Incomes Sheila R Potential Effects of Congressional Welfare Reform Legislation on Family Incomes Sheila R. Zedlewski, Sandra J. Clark, Eric Meier, Keith Watson The opinions expressed herein are those of the author and are not necessarily those of the Urban Institute, its trustees, or its sponsors. Document date: July 26, 1996 Released online: July 26, 1996 Table of Contents Introduction and Summary Effects of Current Social Welfare Spending Proposed Changes to Social Welfare Spending Estimating Effects on Families Effects on Program Spending Effects on Poverty Effects on Total Family Incomes Sensitivity of Results to Assumptions Some Possible Modifications to the Legislation Conclusions Methods and Data (Appendix) LIST OF TABLES Table 1: Summary of Major Changes in Income Security Programs Proposed by H.R. 3734 Table 2: Budget and Caseload Effects of Major Provisions of the Welfare Reform Act (H.R. 3734) Table 3: Effects of H.R. 3734 on Total Family Income and Poverty Table 4: Characteristics of Families Losing Income Under H.R. 3734 Table 5: Effects of H.R. 3734 on Poverty Using Alternative Labor Supply Assumptions Table 6: Effects of Modifications to H.R. 3734 on Poverty and the Poverty Gap The authors would like to thank Paul Johnson for outstanding programming assistance and Isabel Sawhill for helpful comments on an earlier draft. The opinions expressed herein are those of the authors and do not represent the views of the Urban Institute or its sponsors. Introduction and Summary The House and Senate both recently passed sweeping welfare reform bills that would substantially change the current social safety net. These bills would replace Aid to Families with Dependent Children (AFDC) with block grants to the states with a fixed federal payment. In addition, states would be prohibited from using federal money to provide assistance to families for more than five years. The bills also would eliminate federal welfare payments to legal immigrants, reduce SSI benefits for children, and enact a variety of changes in the Food Stamp Program. The welfare reform legislation is designed to decrease dependency on government assistance and to shift more responsibility for social programs to states. Proponents argue that the changes will improve administrative efficiency and increase work and earnings by welfare recipients, thereby saving public funds with a minimal change in material hardship and poverty. Critics argue that the magnitude of the changes in welfare spending is so large that low-income families would be hurt and poverty increased, even if the changes motivate more welfare recipients to exchange dependency for employment. This paper presents estimates of how the major income security changes proposed by H.R. 3734 would affect family incomes.1 We do not include a number of other changes which would have smaller effects on family incomes nor do we consider provisions affecting Medicaid eligibility. Income is broadly defined in this analysis to include cash income; "near cash" income from food stamps, energy and housing assistance, and the earned income tax credit; less taxes. Our methods and analysis follow those used in an earlier study that examined the effects of the 1995 Budget Reconciliation Act on family incomes (Zedlewski, Clark, Meier, and Watson, 1995).2 We estimate the effects of the income security and tax changes in the welfare reform bill by comparing how families will fare under new rules compared to current program rules, making reasonable assumptions about how program changes will affect behavior. Since no one can predict these responses with certainty, we also show the sensitivity of the results to alternative behavioral assumptions. Our findings show that the proposed welfare reform changes would increase poverty and reduce incomes of families in the lowest income group. With the legislation fully phased in, spending on the current social safety net would be reduced by about $16 billion per year compared to current law. We estimate that 2.6 million more persons would fall below the poverty line as a result, including 1.1 million children. More than one-fifth of all families with children would see their incomes fall by about $1,300 per year, on average. Almost half of the families adversely affected by the legislation currently work, and 4 out of 5 families who would be affected currently have incomes below 150 percent of poverty. Alternative assumptions about how many welfare recipients move into jobs when their benefits are eliminated do not produce dramatically different results. Most families on welfare are already poor, and most long-term recipients who leave welfare for jobs will not earn enough to move above the poverty line. The proposed changes in the AFDC, SSI, and Food Stamp Programs would reduce the incomes of a large group of low-income families. We show that the effects of the legislation could be mitigated by allowing states to continue assistance for children whose parents do not successfully find work after five years; by increasing the percent of the caseload states can exempt from the time limit; by restoring eligibility for legal immigrants, and by restoring current food stamp benefit provisions for citizens. Effects of Current Social Welfare Spending The federal government currently spends about 7 percent of its budget for income security programs that are designed to help low-income families. About $107 billion of the federal budget goes directly to families to fund cash assistance (Aid to Families with Dependent Children, AFDC, and Supplemental Security Income, SSI), food stamps, housing, and energy assistance, child nutrition programs, and the refundable Earned Income Tax Credit (EITC). State governments spend an additional $17.5 billion to help finance income security programs.3 Three-quarters of the assistance under these programs is provided to families with children. A large group of American families depends to some extent on the nation's social welfare system.4 Approximately one in four families receives assistance from at least one of the programs listed above. Among low-income families with incomes below 130 percent of poverty, government programs assist 6 out of 10 families. These benefits account for nearly one-third of the total income of this group. Most of the rest of their income comes from earnings. Consequently, these income security programs substantially reduce poverty, especially for families with children. When poverty is measured so that income includes not only all sources of cash but also noncash government support, the number of persons who are poor drops from 43 million to 28 million. The poverty rate for children also drops from 24 percent to 14 percent. Proposed Changes to Social Welfare Spending The welfare reform bill would make major changes to the three largest social welfare programs — Aid to Families with Dependent Children (AFDC), Supplemental Security Income (SSI), and the Food Stamp Program. The major changes proposed in the bill are summarized in Table 1.5 The most fundamental change proposed by the House welfare reform bill would transform the AFDC program from an entitlement to a lump-sum payment to states for Temporary Assistance for Needy Families. The bill also would prohibit states from using the block grant funds to provide assistance to families who have received benefits for five years. This marks a major shift in the AFDC program from an indefinite source of support to a temporary and transitional one. States could exempt up to 20 percent of their caseload from the five-year time limit based on state-defined criteria. Two other changes would eliminate the $50 child support pass-through for AFDC families and require the state to implement a "family cap" unless the state legislature enacts legislation to opt out of this provision. Most noncitizens would lose eligibility for federal assistance under the proposal. AFDC benefits would be denied to noncitizens for their first five years in this country and states would have the option to categorically deny them benefits at any time. Noncitizens would also lose eligibility for SSI and food stamps. In addition to the noncitizen provisions, the major change proposed to the SSI program would eliminate benefits for disabled children who meet the current law eligibility criteria based on Individual Functional Assessments (IFAs) or maladaptive behavior. Food Stamp program rules would be modified to increase countable income, reduce benefits, require older children to file with their parents, and limit nonworking childless adults to a one-time, three-month period of eligibility.6 The legislation would also enact a means-test for meals served to children in Family Day Care Homes under the Child and Adult Care Food Program. We also assume that child support collections for parents receiving IV-D services would increase due to the bill's provisions to improve child support enforcement.7 Estimating Effects on Families In addition to the direct effects of the program rule changes outlined above, the proposed policies would lead to changes in behavior for states and families. The magnitude and complexity of the full package of proposals make it hazardous to predict how states and families will respond. But such behavioral responses may be critical in determining the overall impact of the policy changes on family incomes and government spending; it is essential to make any assumptions about such responses explicit. We use a fairly optimistic scenario for our basic estimates. First, we assume that all states will maintain their current benefit payments, reducing benefit levels only to compensate for the decreased federal contribution. Second, we assume that all states exempt the full 20 percent of their caseload allowable under Federal law. Based on research on how individuals respond to changes in financial incentives, we predict that two-thirds of mothers who lose welfare eligibility as a result of time limits will find jobs, most at part-time hours.8 We assume that they find year-round jobs with an hourly wage of nearly $6.00.9 Most mothers would try to work part time to maximize their net incomes, after work-related expenses and eligibility for other social assistance are taken into account.
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